11-2 Learning Objective 11-1 Explain the role of stock in financing a corporation
11-3 Corporate Ownership The major advantage of the corporate form of business is the ease of raising capital as both large and small investors can participate in corporate ownership. Simple to become an owner Easy to transfer ownership Provides limited liability Because a corporation is a separate legal entity, it can Own assets. Incur liabilities. Sue and be sued. Enter into contracts.
11-6 Equity Versus Debt Financing Advantages of equity Equity does not have to be repaid. Dividends are optional. Advantages of debt Interest on debt is tax deductible. Debt does not change stockholder control. Advantages of equity and debt financing.
11-7 Learning Objective 11-2 Explain and analyze common stock transactions.
11-8 Common Stock Transactions Stockholders’ Equity Contributed Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income
11-9 Authorization, Issuance, and Repurchase of Stock The maximum number of shares of capital stock that can be issued to the public. Issued shares are authorized shares of stock that have been distributed to stockholders. Unissued shares of stock are shares that have never been distributed to stockholders. Unissued Shares Treasury Shares Outstanding Shares Issued Shares Treasury shares are issued shares that have been reacquired by the corporation. Outstanding shares are issued shares that are owned by stockholders. Authorized Shares
11-10 Authorization, Issuance, and Repurchase of Stock
11-11 Par value is typically a very nominal amount such a $0.01 per share. Stock Authorization Par value is an arbitrary amount assigned to each share of stock when it is authorized. Market price is the amount that each share of stock will sell for in the market.
11-12 Some states do not require a par value to be stated in the charter. No-par Stock Stock Authorization
11-13 Stock Issuance Initial public offering (IPO) The first time a corporation issues stock to the public. Seasoned new issue Subsequent issues of new stock to the public. National Beverage issues stock.
11-14 Most issues of stock to the public are cash transactions. Stock Issuance National Beverage issued 100,000 shares of $0.01 par value common stock for $10 per share. 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash +1,000,000Common Stock +1,000 Additional Paid-In Capital +999,000 2 Record dr Cash (+A) (100,000 x $10) cr Common Stock (+SE) (100,000 x $0.01) cr Additional Paid-In Capital (+SE) (1,000,000 – 1,000) 1,000 999,000 1,000,000
11-15 Stock Exchanged between Investors Transactions between two investors do not affect the corporation’s accounting records. I’d like to sell 100 shares of National Beverage stock. I’d like to buy 100 shares of National Beverage stock.
11-16 Stock Used to Compensate Employees Employees pay packages can include stock options Gives the employees the option to acquire company stock at a predetermined price If the employees work hard and meet the corporation’s goals the stock price will increase. Employees can then exercise their option to acquire stock at the lower predetermined price and sell it at the higher price for a profit.
11-17 Repurchase of Stock A corporation repurchases its stock to: Distribute excess cash to stockholders. Send a signal that the company believes its stock is worth acquiring. Obtain shares to reissue for the purchase of other companies. Obtain shares to reissue to employees as part of stock option plans.
11-18 Repurchase of Stock National Beverage repurchases its own stock (Treasury stock) Stockholders Stock options allow employees to purchase stock from the corporation at a fraction of the stock’s market price. Employee Employee compensation package includes salary plus stock options.
11-19 No voting or dividend rights Contra equity account When stock is reacquired, the corporation records the treasury stock at cost. Treasury stock is not an asset. Repurchase of Stock
11-20 National Beverage reacquired 50,000 shares of its common stock at $25 per share. Repurchase of Stock 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash -1,250,000Treasury Stock (+xSE) -1,250,000 2 Record dr Treasury Stock (+xSE, -SE) cr Cash (-A) 1,250,000
11-21 Reissuance of Treasury Stock National Beverage reissued 5,000 shares of the Treasury Stock at $28 per share. No profit or loss is recognized on treasury stock transactions. 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash +140,000Treasury Stock (-xSE) +125,000 Additional Paid-In Capital +15,000 2 Record dr Cash (+A) (5,000 x $28) cr Treasury Stock (-xSE, +SE) (5,000 x $25) cr Additional Paid-In Capital (+SE) [5,000 x ($28 - $25)] 125,000 15,000 140,000
11-22 Learning Objective 11-3 Explain and analyze cash dividends, stock dividends, and stock split transactions.
11-23 Dividends on Common Stock Declared by board of directors. Not legally required. Creates liability at declaration. Requires sufficient Retained Earnings and Cash.
11-25 Dividends Dates National Beverage declares an $2.30 dividend on each share of its 46,200,000 shares of common stock outstanding. 1 Analyze Liabilities Assets = Stockholders’ Equity + Dividends Payable +106,260,000 Dividends Declared (+D) -106,260,000 2 Record dr Dividends Declared (+D, -SE) cr Dividends Payable (+L) 106,260,000
11-26 Dividends Dates National Beverage paid the previously declared $2.30 dividend on its shares of common stock outstanding. 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash -106,260,000Dividends Payable -106,260,000 2 Record dr Dividends Payable (-L) cr Cash (-A) 106,260,000
11-27 No change in total stockholders’ equity. No change in par values. All stockholders retain same percentage ownership. Stock Dividends Corporations issue stock dividends to: Remind stockholders of the accumulating wealth in the company. Reduce the market price per share of stock. Signal that the company expects strong financial performance in the future. Distribution of additional shares of stock to stockholders.
11-28 Record at current market value of stock. Record at par value of stock. SmallLarge The journal entry moves an amount from Retained Earnings to other equity accounts. Stock Dividends Stock dividend > 20 – 25% Stock dividend < 20 – 25%
11-29 National Beverage issued a 20 percent stock dividend on 38,000,000 outstanding shares of its $0.01 par value common stock and accounted for it as a large stock dividend. Stock Dividends 1 Analyze Liabilities Assets = Stockholders’ Equity + Retained Earnings -76,000 Common Stock +76,000 2 Record dr Retained Earnings (-SE) cr Common Stock (+SE) 76,000
11-30 Stock Splits An increase in the number of shares and a corresponding decrease in par value per share. Retained earnings is not affected. A stock split creates more pieces of the same pie. Assume that a corporation had 1,000,000 shares of $0.01 par value common stock outstanding before a 2–for–1 stock split.
11-31 Comparison of Distributions to Stockholders
11-32 Learning Objective 11-4 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.
11-33 Preferred Stock Issuance National Beverage issued 10,000 shares of its $1 par value preferred stock for $5 per share. National Beverage issued 10,000 shares of its $1 par value preferred stock for $5 per share. Usually has no voting rights Usually has a fixed dividend ratePreferred Stock Priority over common stock 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash +50,000 Preferred Stock +10,000 Additional Paid-In Capital Preferred +40,000 2 Record dr Cash (+A) (10,000 x $5) cr Preferred Stock (+SE) (10,000 x $1) cr Additional Paid-In Capital – Preferred (+SE) 10,000 40,000 50,000
11-34 Preferred Stock Dividends Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock. Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid. If the preferred stock is noncumulative, any dividends not declared in previous years are lost permanently.
11-35 Assume the preferred stock of Flavoria carries only a current dividend preference and that the company declares dividends totaling $8,000 in 2012 and $10,000 in 2013. How much would the preferred and common stockholders receive in 2012 and 2013? Preferred Stock Dividends
11-37 Assume that Flavoria Company has the same amount of stock outstanding. However assume that dividends are in arrears for 2010 and 2011. How much would the preferred and common stockholders receive in 2012 and 2013? Preferred Stock Dividends
11-39 Retained Earnings Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating. Baker Company incurred a loss of $120,000 in 2013 that resulted in an Accumulated Deficit in Retained Earnings. Baker Company Comparative Balance Sheets (Partial) For Year Ended December 31 Stockholders’ Equity Common Stock Additional Paid-in Capital Retained Earnings (Deficit) Total Stockholders’ Equity 2014 $ 100,000 750,000 50,000 900,000 2013 $ 100,000 750,000 (70,000) 780,000
11-40 Learning Objective 11-5 Analyze the earnings per share (EPS), return on equity (ROE), and price/earnings (P/E) ratios.
11-41 Net Income Average Number of Common Shares Outstanding EPS = National Beverage’s income for 2011 was $40,800,000 and the average number of shares outstanding during the year was 46,200,000. Earnings per share is probably the single most widely watched financial ratio. Earnings Per Share (EPS) $40,800,000 46,200,000 Shares EPS = = $0.88 per share
11-42 Return on Equity (ROE) Net Income Average Stockholders’ Equity ROE = National Beverage’s income for 2011 was $40,800,000 and the average Stockholders’ Equity was $110,950,000. Return on equity is the amount earned for each dollar invested by stockholders. $40,800,000 $110,950,000 ROE = = 36.8 percent
11-43 Price/Earnings (P/E) Ratio Current Stock Price (per share) Earnings Per Share (annual) P/E = The P/E ratio is a measure of the value that investors place on a company’s common stock. National Beverage’s stock price was $15.10 when the company reported its 2011 EPS of $0.88. $ 15.10 $ 0.88 P/E = = 17.2
11-46 Owner’s Equity for a Sole Proprietorship Only two owner’s equity accounts. A Withdrawal account to record the owner’s withdrawals of assets. A Capital account to record the owner’s investments and the periodic income or loss. Closed to the capital account at the end of each period. No separate retained earnings account.
11-47 Accounting for Owner’s Equity for a Sole Proprietorship To record a $150,000 investment by H. Simpson, the owner. To record H. Simpson’s $1,000 monthly withdrawal.
11-48 Accounting for Owner’s Equity for a Sole Proprietorship To close revenue and expense accounts to capital. To close the $1,000 monthly drawings to capital.
11-49 Accounting for assets, liabilities, revenues and expenses follows the same accounting principles as any other form of business. Accounting for partners’ equity follows the same pattern as for a sole proprietorship. Separate Capital and Drawings accounts are maintained for each partner. Accounting for Partnership Equity
11-50 Accounting for Partnership Equity To record investments by partners Able and Baker who will divide net income as follows: Able, 60 percent and Baker 40 percent. To record the partners’ monthly withdrawal.
11-51 Accounting for Partnership Equity To close revenue and expense accounts to partners’ capital. To close the monthly drawings to partners’ capital.
11-52 Other Business Forms Limited Liability Partnership (LLP) Protects innocent partners from malpractice or negligence claims. Most states hold all partners personally liable for partnership debts. Limited Liability Company (LLC) Owners have same limited liability feature as owners of a corporation. A limited liability company typically has a limited life.
11-54 M11-4 Analyzing and Recording the Issuance of Common Stock To expand operations, Aragon Consulting issued 1,000 shares of previously unissued common stock with a par value of $1. The price for the stock was $50 per share. Analyze the accounting equation effects and record the journal entry for the stock issuance. 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash +50,000 Common Stock +1,000 Additional Paid-In Capital +49,000 2 Record dr Cash (+A) cr Common Stock (+SE) cr Additional Paid-In Capital (+SE) 1,000 49,000 50,000
11-55 M11-4 Analyzing and Recording the Issuance of Common Stock Would your answer be different if the par value were $2 per share? If, so, analyze the accounting equation effects and record the journal entry for the stock issuance with a par value of $2. The effects on total assets and total stockholders’ equity would not differ, but the amounts within the individual stockholders’ equity accounts would differ. 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash +50,000 Common Stock +2,000 Additional Paid-In Capital +48,000 2 Record dr Cash (+A) cr Common Stock (+SE) cr Additional Paid-In Capital (+SE) 2,000 48,000 50,000
11-56 M11-8 Determining the Amount of a Dividend Netpass Company has 300,000 shares of common stock authorized, 270,000 shares issued, and 100,000 shares of treasury stock. The company’s board of directors declares a dividend of $1 per share of common stock. What is the total amount of the dividend that will be paid? Dividends are paid on shares that are issued and outstanding. Dividends are not paid on treasury stock. Shares issued Less treasury stock Shares outstanding Dividend per share Total dividends paid 270,000 100,000 170,000 x $ 1.00 $170,000